While Rhode Island’s government officials were bullish on the state’s economy, parading out its $128.4 million surplus, a national policy agency ranked the state’s fiscal policy among the four worst in the nation.
The state’s fiscal strategy gets a poor grade from State Budget & Tax News, a publication of State Policy Reports, an Alabama-based organization that reports on states’ fiscal policies.
Rhode Island was one of only three states throughout the country to receive a “D” grade for its fiscal strategy. Alabama and California were the others. Three states — Delaware, Indiana and Pennsylvania — received an “A.”
The majority of the other states were graded with a “B” or a “C,” which was the “class average.” Several states were given incomplete grades and a few others were not graded because they did not have significant windfalls. Only one state, New York, received an “F” for its fiscal strategy.
SB&TN was apparently not impressed with Rhode Island’s plans to phase out the inventory and automobile excise taxes.
In a short explanation of its grading, the magazine said: “Rhode Island, where the future economic outlook is shaky at best, has adopted large tax cuts to be phased in over nearly a decade.”
According to the SB&TN report, states throughout the country — because it is an election year and surplus money was plentiful — felt pressured to implement permanent tax cuts and spending increases that would create “implicit commitments, if not legal obligations,” to higher spending in future years.
Throughout the country, said the SB&TN report: “the unusual circumstances brought warnings from fiscal experts, experienced elected officials and some fiscal watchdog groups against over-committing state resources in ways that would lead to future fiscal crises and tax increases.”
Gary Sasse, executive director of the Rhode Island Public Expenditure Council, describes State Policy Reports as a “pretty objective” group. Although Sasse also points out that any report card system is subjective and should always be “taken with a grain of salt.”
“They are raising the issue of how decisions made during good economic times impact future budgets,” Sasse said.
Sasse said the SB&TN report should be regarded as a tool. He also defended some of the tax cutting initiatives adopted in this year’s state budget, most notably, property tax reduction initiatives. RIPEC has been a strong supporter of property tax cuts.
“We fully support efforts to reduce property taxes, which had become among the highest in the country,” Sasse said.
The SB&TN report, Sasse said, sends the message that we need to set priorities and that decisions made during good economic times have a long-lasting impact.
“It may be that in the future there is less room for program growth,” Sasse said. “Given the obligations of the current budget, the governor and the legislature will have to set priorities going forward. We would suggest that they stay the course and reduce property taxes as scheduled.”
The SB&TN report acknowledges that the true measure of a state’s fiscal strategy may not come until a turn in the economy tests how prepared — or unprepared — a particular state may be. In part, the report reads; “Many observers, particularly leaders and staff of associations of state officials, say that the states have done a better job of avoiding over-commitments than they did in previous periods of rapid economic expansion. It is hard to make this judgment until the fiscal strategies are tested by fiscal adversity.”
Still, Rhode Island’s report card does not fare well when compared to other New England states. While the SB&TN report gave both New Hampshire and Vermont incomplete grades, Maine and Connecticut both received marks of “C.” Massachusetts scored the highest of all New England states, receiving a “B.”
Peter Moore, a professor of economics and finance at Rhode Island College and director of the school’s Center for Economic Education, agrees that there is always a danger in locking into long-term spending programs. It is critical, he said, to strike a balance.
“The state has to be very careful about taking on long-term expenditure programs that obligate us in future times when they may be more difficult to fund,” Moore said. “That money — if it is obligated — would have to come from somewhere else.”
For example, he wouldn’t want to see money stripped from higher education, which has long been under-funded, Moore said.
He added that a budget surplus is an opportunity to bolster spending on programs in which investments have been lagging behind.
“I’m not suggesting that now is the time to take all the money and put it in the bank,” Moore said. “The idea is to put the money into things now that will cushion us against economic downturns in the future.”
Leonard Lardaro, a professor of economics at the University of Rhode Island, said it is time for the state to reaffirm its commitment to education.
“What Rhode Island needs to do is provide a long-term funding mechanism for public education,” Lardaro said.
Tax phase-outs, said Lardaro, too often treat a symptom, but not a problem. He calls the plan to phase out the excise tax on automobiles over seven years a “big mistake.” Within the next seven or eight years, Lardaro said, it is likely that Rhode Island will have suffered through another recession. However, in the short term, Lardaro was consistent with several other area economists that project the odds of a recession soon at 25 to 30 percent.
Long-term commitments, Lardaro said, may put the state into a position where it needs to find new funding sources.
“I’m sorry I have to point this out,” Lardaro said. “But raising taxes during a recession is not such a good idea.”
